ITAT Reduces Estimated Profit Rate from 8% to 5%; Upholds 8% Profit Estimation Excessive for Infrastructure Sub-Contractor Operating in Remote Areas [Read Order]

The Income Tax Appellate Tribunal (ITAT) Chennai Bench has reduced the estimated profit rate of an infrastructure contractor from 8% to 5%, holding that the Assessing Officer’s estimation was excessive considering the assessee’s status as a sub-contractor operating in remote and difficult terrains.

The assessee Envista Engineering & Construction Private Limited engaged in contract works had filed its return for Assessment Year 2015-16 declaring an income of ₹1.52 crore on a turnover of ₹27.45 crore reflecting a profit rate of 2.28%. The case was selected for limited scrutiny under CASS to verify large other expenses claimed by the assessee.

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However, during assessment proceedings the Assessing Officer observed that major labour expenses were supported only by self-made cash vouchers and that the assessee failed to furnish third-party confirmations, project-wise reconciliations, measurement books and other verifiable evidence.

Consequently, the books of account were rejected under Section 145(3) of the Income Tax Act,1961, and profit was estimated at 8% of turnover. As a result the assessee stated that the low profitability was attributable to project delays, cost escalations and execution of works in remote and hilly regions.

It was further argued that comparison with large listed infrastructure companies such as Larsen & Toubro and IRB Infrastructure Developers was misplaced because the assessee was merely a sub-contractor with comparatively smaller operations.

The Revenue department maintained that the defects in books were substantial and the assessee had failed to discharge the burden of proof by producing reliable supporting records.

The Tribunal upheld the rejection of books observing that the assessee failed to maintain verifiable labour records and relied heavily on self-made vouchers lacking evidentiary credibility. The Bench comprising Inturi Rama Rao and Manu Kumar Giri held that invocation of Section 145(3) was justified in the facts of the case and held that the 8% rate adopted by the Assessing Officer was on the higher side.

The Bench observed that the comparables relied upon by the Revenue were not functionally similar and Section 44AD could not be mechanically applied where turnover exceeded statutory limits.

Accordingly, the Tribunal estimated the profit at 5% of turnover and partly allowed the appeal in favour of the assessee.

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